A State TreasureConnecticut's Denise Nappier uses her office to take corporations to task

by G. Jeffrey MacDonald

Think about it. If you had $20 billion to invest, you could do more than just make a whole lot of money. You could also create a wealth of positive change in the companies whose stocks you hold.

At least that’s how Connecticut State Treasurer Denise Nappier has been using her power. Entrusted with the pension funds of the state’s 160,000 working and retired state employees, Nappier demands not only a good return, but good citizenship.

Take American Electric Power, for example. For three years, Nappier sponsored shareholder resolutions urging the nation’s largest producer of carbon dioxide emissions to study and report on the climatic impact of its electricity-producing plants. The company resisted, but Nappier persisted, and it finally agreed to conduct an analysis in 2005.

Then there’s Western food giant Safeway Inc., which Nappier challenged to appoint more independent board members when it found itself embroiled in an ugly labor dispute in 2003. She says the workers’ long strike highlighted deeper financial problems — a situation she aimed to remedy by pushing for structural change within the company. The board has now added independent members, and Nappier’s staff has met with Safeway officials.

With power plays like these, Nappier, an African American native of Hartford, is helping shape policy inside the nation’s traditionally clubby, white male corporate boardrooms. Not surprisingly, her efforts, along with those of like-minded others who manage multibillion-dollar pension funds, have incurred the wrath of business groups — most notably the U.S. Chamber of Commerce.

“In Connecticut, you have a state treasurer who’s putting politics ahead of shareholder interests,” says David Hirschmann, senior vice president of the U.S. Chamber.

But investors with an eye to igniting social change largely regard Nappier as an impressive trendsetter.

“She actually delivers power, economic power, and leverage for companies to do the right thing,” says Tim Smith, senior vice president of Walden Asset Management in Boston and president of the Social Investment Forum, an industry association for ethically minded investment firms. “She’s really a leader, and she’s willing to take the slings and arrows that come with it.”

Being in the vanguard is nothing new for Nappier, who in 1998 became not only the first African American woman to hold statewide office in Connecticut but the first African American woman to hold a U.S. state treasurer’s seat. She’s building on a 40-year tradition of shareholder activism by demonstrating how vast a stock owner’s influence can be, yet she is helping remake that tradition by insisting her activism is first and foremost in service of garnering the best financial return.

“It’s assumed that because I’m female and I’m black that I’m doing this all for social purposes,” she says. “I go to great pains to establish my fiduciary obligation to push for corporate governance reform.”

Shareholder activism traces its roots back to the late 1960s, when a socially responsible investing movement began to hone the “triple bottom line.” Investors began to measure success in terms of social and environmental impacts as well as financial ones.

For years, these activists wielded plenty of conscience but little clout. Their investment stake represented less than 1 percent of corporate capital, so their cries for companies to pay higher wages or practice eco-friendliness sounded like whimpers.
But in the 1980s and ’90s, pension funds for public employees and labor unions rapidly ballooned, building would-be activists a mightier platform. Today, the pension-fund investors wield a $3 trillion-plus portfolio, which has bought them a 25 percent stake in America’s publicly traded companies.

“I do think this particular episode of shareholder activism by institutional investors is sui generis,” says Sanford Jacoby, professor of management and public policy at UCLA’s Anderson School of Management. “It’s really not something that’s happened before.”

Corporate management often questions whether activists might harbor ulterior motives beyond the company’s financial well-being. That’s where Nappier’s approach has been successful, because she bases every argument on its financial implications.

Still, not everyone in the corporate world buys the idea that the shareholder activism of Nappier and others is strictly bottom-line motivated.

“We know that the real agenda is to try to influence the boardroom to make concessions to the particular special interest that is making the attack,” says Hirschmann. “We believe everybody has an absolute right to be as active and vocal as they want. However, we think folks need to beware that the agenda here is not good corporate governance” — or increasing value for shareholders — “but rather, pure and simple, special-interest power politics.”

Whatever one believes is the underlying agenda, the results have been astonishing. Consider the recent case of the Walt Disney Company, where CEO and chair of the board Michael Eisner had long enjoyed one of the most powerful positions in American business. In March 2004, however, Eisner had to grudgingly relinquish his chairmanship after 43 percent of Disney shareholders voted to take him off the board. Later, the company permanently separated the positions of CEO and chair in order to give board members maximal independence in watchdogging management.

Three thousand miles away from Disneyland, Nappier quietly withdrew a similar resolution, which would have forced the issue at a shareholder meeting.

“Score one for Ms. Nappier,” trumpeted an editorial headline in the Jan. 13, 2005, Hartford Courant. “Ms. Nappier has played a positive role as an aggressive advocate for change. Those changes will help restore faith in corporations after scandals in which directors sat on their hands while executives plundered some of America’s largest companies.”

The shareholder power utilized by Nappier and other big public investors is not entirely new. The city of New York has used its pension-fund leverage to help sway corporate policy for decades. The California Public Employees Retirement System throws around its weight to the tune of $183 billion, making Nappier’s $20 billion pot of state dough seem like petty cash.

More developments are in the works. Nappier currently awaits reports on climate change not just from American Electric Power but from energy com- panies Cinergy Corp., TXU Energy and Southern Company. Oil giant ConocoPhillips may also follow suit.

“Finally, somebody was saying climate was a financial issue as well as an environmental one,” says Mindy Lubber, executive director of CERES, a Boston-based coalition of ethically minded investing organizations. “It is changing the frame to say that environmental issues like global warming are business issues.”

Nappier is one of 12 current female state treasurers or controllers, but to expect similar activism from the other 11 might be a stretch. Because of variations in state law, few enjoy the influence of Nappier, who is the sole fiduciary of retirement funds in Connecticut.

What’s more, women who run the treasuries in such states as Kansas, North Dakota and Wyoming work in settings devoid of a shareholder activist tradition. When asked if they foresee greater activism in their neck of the country, staffers in each of those offices indicated that no one should hold his or her breath.

Yet Nappier has inspired some states to action. A task force of the Maryland State Retirement and Pension System (MSRPS), for example, has been drafting proxy voting guidelines that will marshal its more than $30 billion fund into a force for shaping policy at public companies.

“I think what Connecticut has done is put some issues on the table,” says Tom Lee, executive director of MSRPS. “It’s a matter of making sure our role as fiduciary is being met.”

Whether or not activists will be successful in their resolutions at various shareholder meetings this spring remains to be seen. What’s certain, however, is that money talks — especially $20 billion — and so corporate board members will have to listen.